WIND PROJECT DEVELOPMENT : BUSINESS OPPORTUNITIES AND SUITABLE BUSINESS MODELS FOR VIETNAM

Transcription

1 WIND PROJECT DEVELOPMENT : BUSINESS OPPORTUNITIES AND SUITABLE BUSINESS MODELS FOR VIETNAM OLIVER MASSMANN MANAGING PARTNER DUANE MORRIS VIETNAM LLC 2010 Duane Morris LLP. All Rights Reserved. Duane Morris is a registered service mark of Duane Morris LLP. Duane Morris Firm and Affiliate Offices New York London Singapore Los Angeles Chicago Houston Hanoi Philadelphia San Diego San Francisco Baltimore Boston Washington, D.C. Las Vegas Atlanta Miami Pittsburgh Newark Boca Raton Wilmington Cherry Hill Princeton Lake Tahoe Ho Chi Minh City Duane Morris LLP A Delaware limited liability partnership 1

2 AGENDA ACCESS THE MARKET: INVESTMENT AND CORPORATE FORMS MARKET STRUCTURE INVESTMENT INCENTIVES OBSTACLES FOR FOREIGN INVESTORS RECOMMENDATIONS 2

3 ACCESS THE MARKET: INVESTMENT AND CORPORATE FORMS No foreign ownership restriction for foreign investment in energy in Vietnam Available investment forms: 100% foreign invested company, joint venture or public private partnership in the form of BOT contract. Corporate forms: limited liability company, joint stock company, private company or limited partnerships. 3

4 WHY BOT IS THE BEST INVESTMENT FORM FOR ENERGY PROJECTS? Easier to negotiate more favorable electricity rates. Easier to obtain more government guarantees, especially in terms of EVN s obligations to purchase all electricity from the project. More fiscal and financial incentives. Precedent large-scaled BOT power projects in Vietnam: Phu My, Vung Ang, Mong Duong 2 4

5 MARKET STRUCTURE EVN is the state monopoly in transmission and distribution in power sector. It purchases all electricity generated from on-grid independent power projects. EVN owns half of power production plants in Vietnam. The remaining power plants are owned by state-owned corporations (Vinacomin, PVN) and private investors. It is in a difficult financial conditions; by the end of 2011, EVN owed PVN, the oil and gas monopoly in Vietnam, US$570 million. The consumer electricity tariff is regulated by the Electric Regulatory Authority of Vietnam (ARAV). EVN, in principle, cannot purchase electricity from independent power plants at the rates higher than the consumer rates. Current average consumer rate: about 6 cents/kwh. Consumer tariff is progressive: The more electricity is consumed, the higher tariffs will be. Most of wind energy projects are developed by independent producers. 5

6 INVESTMENT INCENTIVES: MORE FAVOURABLE TARIFF FOR WIND ENERGY PROJECTS Decision No. 37/2011/QD-TTg dated 29 June 2011 on new tariff for wind energy projects in Vietnam: EVN has to purchase electricity from on-grid wind energy projects at VAT-excluded price of 7.8 US cents/kwh EVN has take-or-pay obligations towards wind energy developers Term of wind energy PPAs is 20 years Compare with wind tariff in other countries? 6

7 Wind Tariffs Worldwide(*) Onshore Wind Energy Term US cents/kwh China 8.9 Offshore Wind Energy Term US cents/k Wh Germany France Portugal Denmark Thailand (>50kW) The Philippines (proposed on July ) Vietnam (*) at the courtesy of GIZ

8 INVESTMENT INCENTIVES: MORE FAVOURABLE TARIFF FOR WIND ENERGY PROJECTS BUT: How can the government help EVN cover losses from purchasing electricity from wind energy projects? Currently: The government subsidizes 207 VND/kWh for all electricity EVN purchases from wind energy plants. The Government cannot continue subsidizing EVN as currently. Solution? The government should adopt a feed-in tariff for wind energy in particular and renewable energy in general. The basics of a feed-in tariff mechanism is that the additional costs for production of energy will be divided among electricity users to assure a stable cash flow for renewable energy developers. GIZ: Each household only needs to pay an additional amount of VND 1,666 6,666 (equivalent to 8 32 US cents per month) if EVN pays an addition of 1-4 cents to wind energy power plants. 8

9 INVESTMENT INCENTIVES: OTHER FINANCIAL AND FISCAL INCENTIVES Machines and materials, that are not produced domestically and imported as fixed assets of the projects, are entitled to import duties exemption. Wind energy projects are considered as projects in a special priority sector for investment and entitled to low corporate income tax rates, exemption, and reduction in accordance with the applicable corporate income tax law. Wind energy operators are also subject to exemption and reduction of land use fee and rental in accordance with the regulations governing projects in special priority sectors for investment. These incentives are also applicable to off-gird wind energy projects 9

10 INVESTMENT INCENTIVES: THE LEGAL FRAMEWORK IF MOVING TOWARDS DEMONOPOLIZATION Dismantling generation companies from EVN: In notification No. 174/TV- VPCP (25 July 2011) of the Government Office, EVN must submit a proposal on establishment of generation companies (GENCO) from its production entities to the Prime Minister in Production companies of EVN amounts to nearly 50% of generation capacity of the whole market. EVN has submitted to the MOIT its proposal to establish three generation corporations to operate all EVN s power plants. The pilot electricity auction market has been operated since July 2011, after a lengthy delay. However, there are still many loopholes in operation of this market, particularly in terms of transparency in offering and accepting prices and reliability of the electric system. 10

11 OBSTACLES FOR FOREIGN INVESTORS The increase of wind energy tariff for IPPs is encouraging, but not enough to guarantee bankability of the projects. As long as customer electricity rates are low, EVN cannot agree on a higher price for electricity from wind energy projects. Large payment for relocation fees. Wind power construction projects are usually set to be located at the coastal areas with the residence of a large number of households. As long as EVN remains the monopoly in the sector, there is no guarantee of fair price for wind energy projects as well as fair competition in the market. Up to date, there has been no specific legal instrument providing procedures for negotiation of an off-grid PPA. In practice, the seller has to enter into an agreement on electricity price with the local People s Committee and the PPA with a lawful distributor (often a subordinate body of the local People s Committee) in the relevant area. 11

12 OBSTACLES FOR FOREIGN INVESTORS Government guarantees cannot be trusted: In Vinashin default on a US$60 initial payment on a syndicated loan to the international lender: the government argues that a comfort letter issued by the Government when the loan was issued in 2007 does not constitute an implicit guarantee and declines its obligations for repayment of the loan.. 12 Vietnam only has detailed regulations on government guarantee for foreign loan and bond issuance. There is no specific regulation on other government guarantees, including guarantees for performance of stateowned companies (e.g. EVN). Given the foreign exchange reserves of Vietnam is still low (US$17 billion April 2012), any government's guarantee on foreign currency availability and transfer for power projects is of little value

13 OBSTACLES FOR FOREIGN INVESTORS Other macroeconomic issues: Inflation rate: more than 20% in 2011, only second to Venezuela. Catastrophic devaluation of Dong in 2011 Dim economic outlook: slowing growth, rising risks Seeking loans for power projects in Vietnam may be difficult because of the unreliability of government guarantees and bad financial conditions of some state-owned companies. Corruption, red tape and absence of an impartial court system 13

14 RECOMMENDATIONS FOR INVESTORS Difficult time but opportunities await. For example, wind energy projects can be surprisingly lucrative if combined wind farms with tourism and other services!!! Public private partnerships (e.g. - BOT) should be the first option. Sound financing structure, good business model and great legal assistance are keys to success. Accurate prediction of where the market is heading to, in the context of Vietnam s critical power shortage, should be considered. More pressure on the government to adequately address key issues on tariff increase, demonopolization of the power market and government guarantee. Vietnam s market is extremely in need of financing and EPC capability. There are rooms for cost-effective and high quality EPC contractors and resourceful lenders. In many cases, you can test the water with a small power plant project. 14

15 OF A FINAL NOTE: HOW TO CHOSE LEGAL ADVISORS FOR YOUR PROJECT IN VIETNAM? WATCH OUT AND FOLLOW ADVICE BELOW STEP BY STEP! BEFORE YOU SIGN ANY SERVICES AGREEMENT WITH ANY LEGAL ADVISORS/LAW FIRM/CONSULTING FIRM IN VIETNAM PLEASE DO THE FOLLOWING: COPY PASTE THIS REQUEST IN YOUR TO THEM AND WAIT FOR THE REPLY: Dear Ms/Mr., Please send us the valid evidence that your company has an international standard and enforceable offshore professional legal liability insurance with dispute resolution offshore Vietnam and not subject to Vietnamese court or Vietnamese arbitration. We would be happy to cooperate and retain your services if you can prove that your company is professionally insured to provide legal services to international clients according to international standards. Thank you very much Best regards, 15

16 THANK YOU For further information, please contact Oliver Massmann at Duane Morris Vietnam LLC Pacific Place Unit V1307/1308, 13th Floor 83B Ly Thuong Kiet Street Hoan Kiem District, Hanoi Vietnam Phone: Fax: